There’s a Lawsuit – Part Deux

And you can say that again! This one lasted ten (count ’em, ten) years, in Surrogate’s Nassau. This is the celebrated case of Estate of Pearl B. Kalikow, Deceased, Eugene Shalik, Executor, and Edward M. Kalikow and Laurie K. Platt, Limited Administrators, T. C. Memo. 2023-21, filed 2/27/23.

For my readers outside the two outlying islands and scrap of mainland North America that comprise Our Fair City, the late Pearl was the relict of an ultra-high real estate roller, and the life tenant of a QTIP holding interests in ten (count ’em, ten) high-class apartment buildings and some cash and stocks. The late Pearl was entitled to net income for life, with trustees having power to invade. Pearl’s QTIP was fully invested in the FLP set up to manage the properties.

Needless to say, we’re not dealing with pennies here. The battle royal involves Pearl’s estate claiming the trustees short-changed the late Pearl to the extent of $16 million in undistributed income, which was going to charity through her estate. The limited ex’rs claim the trustees overpaid $3 million. They finally settled in Nassau Surrogate’s for $9 million in income, estate administration commissions payable to ex’rs both general and limited, legals and accountings.

So what was in Pearl’s estate at DoD?

The ex’rs and the trustees file dueling Forms 706.

IRS says the $9 million settlement is included in Pearl’s estate. The limited ex’rs say the estate should be reduced by $4 million of undistributed income (stipulated in the settlement between trustees and ex’rs in Nassau Surrogate’s), and the rest as estate administration deductions.

We know Section 2044 loads the whole worth of a QTIP in second-to-die’s estate, even though s/he only had a life estate; that pays for first-to-die getting the trust corpus out of her/his estate. And the limited ex’rs and IRS stipulated that the worth of Pearl’s estate’s interest in the FLP (which was the trust’s biggest asset) was $54 million. But the limited ex’rs want to exclude the $4 million.

Ex-Ch J Michael B (“Iron Mike”) Thornton won’t wear it.

“We are unpersuaded. Having stipulated that the relevant value of the [QTIP] Trust’s [FLP] partnership interest was $54,492,712, the limited administrators cannot successfully argue for some lesser value of this asset on account of the undistributed income payment liability. In any event, the settlement agreement imposes the liability for the settlement payment jointly and severally upon the [QTIP] Trust, the Article Fourth Trust, and the Article Fifth Trust (the latter two trusts having been created by decedent’s husband’s will for the benefit of [son and daughter] to receive the residue of the [QTIP] Trust after decedent’s death). The liability for the settlement payment does not run to [FLP]. Consequently, there is no basis to conclude that this liability would affect the date-of-death fair market value of the [QTIP] Trust’s [FLP] partnership interest, i.e., the liability would not affect the price of this partnership interest as determined between a hypothetical willing buyer and seller as of the date of decedent’s death.” T. C. Memo. 2023-21, at pp.10-11. (Footnotes omitted).

As for the claimed administration deductions, those apply only when the estate is defending claims, not bringing them.

“The parties devote much of their arguments to the question of whether the various components of the agreed-upon settlement payment meet the limitations on deductibility as set forth in Treasury Regulation § 20.2053-8(b). These arguments are misdirected. The limitations on deductibility set forth in these regulations do not apply with respect to claims in favor of the estate that are includible in the decedent’s gross estate under section 2031. The obligation of the [QTIP] Trust to make the agreed-upon settlement payment to the estate does not give rise to any deduction by the estate. Rather,  the estate’s claim against the [QTIP] Trust is itself property to be included in the gross estate. Even if we were to assume, for the sake of argument and in the absence of any evidence in this regard, that the estate actually incurred the fees and commissions specified as components of the agreed-upon settlement payment, reimbursement of these expenses under the settlement agreement would preclude any deduction by the estate. See Treas. Reg. § 20.2053-4(d)(3).” T. C. Memo. 2023-21, at p. 13.

But IRS did concede a deduction of  $800K in paying out commissions, which gives ex-Ch J Iron Mike a SMH footnote.  “Without expressing any view about the legal correctness of respondent’s concession, we accept it in the interests of judicial economy. See Liljeberg v. Commissioner, 148 T.C. 83, 97 (2017) (“In practice, the Court will accept concessions of law in the interest of judicial economy unless justice requires otherwise.”), aff’d, 907 F.3d 623 (D.C. Cir. 2018). T. C. Memo. 2023-21, at p. 14, footnote 19.

For Liljeberg, see my blogpost “At Home Abroad – Part Deux,” 3/16/17.